"Ha!" my pal the real estate agent said to me the other day. "You've missed the boat on this one, Steve. The housing market bottom is in and you still can't see it."
And at that moment I just couldn't help myself; I my rolled eyes and let out a long-winded sigh. I had been through this bit before with the guy.
You see, my friend Charles has been taunting me for years now, giving me the old "I told you so" routine at even the faintest rustle in the housing bushes.
And like Linus on a blustery October night, he thinks he is finally seeing the Great Pumpkin: Home prices, he insists, have stabilized. . . and may never look back.
The Best Free Investment You'll Ever Make
Stay on top of the hottest investment ideas before they hit Wall Street. Sign up for the Wealth Daily newsletter below. You'll also get our free report, Gold: The Armageddon Hedge by our resident gold expert, Greg McCoach.The Housing Market Bottom? Not Quite
In fact, he hammered me with his latest volley on Tuesday, about two minutes after the most recent home price data hit the Street.
According to the Case-Shiller Home Price Index, seasonally-adjusted home prices crept higher in July, marking the third straight monthly gain. It was music to Charlie's ears.
Loaded for bear now, he moved in for the kill.
Of course, there was one little problem with his argument. Compared to July 2008, home prices actually fell 13.3% year over year.
That's the cold, hard reality that most people like Charles would just as soon ignore. Instead, they hang their hats on the month-over-month comparisons, trying to turn molehills into mountains — or in this case, bigger commissions.
Unfortunately, "less bad" data doesn't exactly make the best foundation for the next bull market.
And while I, as much as anyone, wish they were true, the facts about the housing market still leave a lot to be desired — no matter how much time Charles spends rubbing his lucky rabbit foot.
That's because the latest brand of housing bulls don't yet realize that without the $8,000 first-time homebuyer tax credit, none of this measly bounce would have happened at all. . .
The Helping Hand of Uncle Sam
Once again, it was your Uncle Sam that skewed the market.
In fact, according to the National Association of Realtors, Uncle Sam's largess will lead directly to an additional 350,000 homes being sold this year. And while that may make guys like Charles a few extra bucks this year, the program's price tag is $15 billion — which, when you do the math, adds up to $43,000 per each additional home sold!
Of course, in a twisted place like Washington D.C., that's trumpeted as a victory.
The rest of us know otherwise.
Even worse is that once the tax credits come to an end, housing will be right back where it started. In fact, the housing market might actually be worse off than it was before, since the tax credits have only managed to pull those sales forward from the future.
Here today, gone tomorrow.
In that regard, it's not much different than what we have seen with the over-hyped Cash for Clunkers program. Take away the helping hand from Uncle Sam. . . and the sales fall right off the table.
Unfortunately, that's not the only way Uncle Sam has been propping up the housing market. . .
Besides tax credits, the government has also been actively working behind the scenes to help keep mortgage rates low.
The Fed does it by buying up every piece of mortgage paper in sight; the result is lower rates, as they buy on the margins.
However, as good as those low rates may be in the short term, the Fed has committed "only" $1.25 trillion to the mortgage market — and 75% of it has already fallen down the rabbit hole.
That leaves roughly enough money to extend the program — by the Fed's own admission — only into the first quarter of 2010. When it ends, interest rates will have no where to go but up — by some estimates, as much as 0.50%. Add higher interest rates to the picture and purchasing power goes down — not up — smothering the recent uptick.
Housing's Dirty Little Secret
But those aren't the only two things that will keep housing on the mat next year. On top of everything else, the dirty little secret in all of this is that there is a "shadow inventory" of foreclosed homes about to hit the market this spring.
In fact, the banks have kicked this little can so far down the road now that there is a tidal wave of homes out there that will need to be dealt with, either through short sales or foreclosures.
According to Ivy Zelman, CEO of Zelman & Associates, that wave could reach as high as 3 to 4 million distressed homes hitting the market, since 3.7 million homes are either already in the foreclosure process or are at least 90 days past due.
That's an important distinction, since a recent analysis of foreclosure rates by the Amherst Group showed cure rates for these loans are practically non-existent. The Amherst data noted a near 0% cure rate of all loans in foreclosure, while loans 90 plus days past due were cured only 0.8% of the time.
As for loan modifications, you can practically forget them — 70% of all loans re-default within 12 months. You can add them to the total pushing the number even higher.
In that regard, Amherst actually believes the real shadow inventory of distressed properties will be closer to 7 million, equivalent to 135% of the average number of homes sold in a year.
So when you add it all up, the picture you get is lot less rosy than the one my pal Charles is trying to paint. And I haven't even mentioned what soaring unemployment, exploding option ARMS, and the collapse of the FHA will do the market.
One of these days, Charles will get it right.
Today's just not that day — not by along shot.
Your bargain-hunting analyst,
Steve Christ, Investment Director
The Wealth Advisory
P.S. The homes in your neighborhood are only part of the equation when it comes to real estate. The other side of coin is happening down at the local mall, where commercial real estate is about to implode. To learn more about this brewing collapse and how to profit from it, click here.
On oil: look to the value of the dollar for clues on oil prices; ending turmoil in the Mid-East - regardless of who wins or how - will probably drop oil prices rather than raise them. Oil companies like repressive regimes that keep the populace in line (and not attacking oil rigs) over messy democracies with their citizens clamoring for a slice of the oil profits (nominally, think Venezuela). Think Saudi Arabia, Kuwait, Russia, Iran. Name one successful oil-exporting country that's also a democracy (aside from Canada, of course, the exception to the rule). See what I mean? If you want to get excited about oil prices, fathom me this: why is it that when crude was $140/bbl gas sold for $4/gal, and now that oil is less than $70/bbl, and US crude consumption is down about 5%, and refineries are under-utilized, gas sells for $3/gal? Competition, my foot. Sure, "exploration costs are astronomical," but weren't they two years ago too?
No, housing hasn't bottomed yet. Maybe 18 months or so, maybe 24. We'll see. But, the figures in the article equating the cost of the gov't housing subsidy are only valid if you assume that only 350,000 additional homes were sold as a result. That presumes that only one in six home sales were spurred by the incentive, a very tenuous supposition; how say you realtors and brokers?
The assumption is that absent any gov't incentive, the rate of decline in home prices would have remained the same, and no additional foreclosures would have occurred, while simultaneously implying that had we had no assistance program housing prices would fall quicker. The reality is we have a death-spiral where declining prices force more foreclosures, more foreclosures put more houses into the markets, and as the supply goes up, prices go down. I think the gov't intent was to break that cycle; once the incentive money stops, we'll see what percentage of home purchases were really driven by the incentives and what would have happened absent the incentive program. The question is, are you prepared to see the value of your home erode another 20% or more, 50% even? Or do you favor actions by the gov't to stabilize those prices? The only folks I've seen lamenting efforts to stall this slide-into-depression are people who either own their homes outright, or have no realistic clue how much the value of their home has already eroded - or could further. It's a slippery slope either way. Ancient Chinese proverb goes: "Be careful what you wish for." In the final analysis, if breaking the back of the "recession" costs a few trillion dollars, isn't that less than the cost to the economy if its back isn't broken, and quickly? That's the question and the trade-off. $11 Trillion was lost in the market collapse and the housing debacle; as housing continues to decline, what would you pay to stop it, absent the assumption that it will stop on its own (shades of the 1930's and '40's pre-war)? There is no free lunch.